Rebuilding Iraq: Continued Progress Requires Overcoming Contract 
Management Challenges (28-SEP-06, GAO-06-1130T).		 
                                                                 
The United States, along with its coalition partners and various 
international organizations, has undertaken a challenging,	 
complex, and costly effort to stabilize and rebuild Iraq. The	 
Department of Defense (DOD) has responsibility for a significant 
portion of the reconstruction effort. Amid signs of progress, the
coalition faces numerous political, security, and economic	 
challenges in rebuilding Iraq. Within this environment, many	 
reconstruction projects have fallen short of expectations,	 
resulting in increased costs, schedule delays, reduced scopes of 
work, and in some cases project cancellations. This testimony (1)
discusses the overall progress that has been made in rebuilding  
Iraq and (2) describes challenges faced by DOD in achieving	 
successful outcomes on individual projects. This testimony	 
reflects our reviews of reconstruction and DOD contract 	 
management issues, as well as work of the Special Inspector	 
General for Iraq Reconstruction. In our previous reports, we have
made several recommendations to improve outcomes in Iraq. DOD	 
generally agreed with our recommendations.			 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1130T					        
    ACCNO:   A61548						        
  TITLE:     Rebuilding Iraq: Continued Progress Requires Overcoming  
Contract Management Challenges					 
     DATE:   09/28/2006 
  SUBJECT:   Contract administration				 
	     Cost analysis					 
	     Defense procurement				 
	     Department of Defense contractors			 
	     Financial analysis 				 
	     Foreign governments				 
	     Government contracts				 
	     International cooperation				 
	     International relations				 
	     Program management 				 
	     Risk management					 
	     Schedule slippages 				 
	     Strategic planning 				 
	     Iraq						 

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GAO-06-1130T

     

     * Summary
     * Background
     * U.S. Efforts Have Produced Mixed Results in Restoring Iraq's
     * Iraq Contracting Challenges Reflect Systemic Issues Faced by
          * Matching Requirements with Available Resources
          * Oversight and Workforce Issues
          * Using Interagency Contracting Vehicles
          * Initial Inability to Benefit from Competition
     * Conclusions
     * Scope and Methodology
     * GAO Contacts and Staff Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Testimony before the Committee on Government Reform, House of
Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Thursday, September 28, 2006

REBUILDING IRAQ

Continued Progress Requires Overcoming Contract Management Challenges

Statement of Katherine V. Schinasi, Managing Director, Acquisition and
Sourcing Management

GAO-06-1130T

Mr. Chairman and Members of the Committee:

I am pleased to be here today to discuss the contracting challenges the
Department of Defense (DOD) faces in achieving successful acquisition
outcomes in its efforts to stabilize and rebuild Iraq. The United States,
along with its coalition partners and various international organizations,
has undertaken a challenging and costly effort to stabilize and rebuild
Iraq. This enormous effort is taking place in an unstable security
environment, concurrent with Iraqi efforts to transition to a permanent
government, and relies heavily on private companies for success. DOD has
responsibility for a significant portion of the reconstruction efforts and
has awarded and managed many of the large reconstruction contracts, such
as contracts to rebuild Iraq's oil, water, and electrical infrastructure.

As we have previously noted, amid signs of progress, the coalition faces
numerous political, security, and economic challenges in rebuilding Iraq.1
For example, our recent assessment of the security situation in Iraq found
that the conditions have deteriorated and grown more complex, as evidenced
by the increased number of attacks and growing sectarian violence. Within
this environment, many reconstruction projects have fallen short of
expectations, resulting in increased costs, schedule delays, reduced
scopes of work, and in some cases project cancellations. Poor acquisition
outcomes are not unique to Iraq; we designated DOD's contract management
activities as a high-risk area more than a decade ago. In our January 2005
high-risk report, we noted that DOD needs to use sound business practices
when buying goods and services and have the right skills and capabilities
in its acquisition workforce to properly manage these acquisitions.2

Today, I will briefly discuss the overall progress that has been made in
rebuilding Iraq and then describe challenges faced by DOD in achieving
successful outcomes on individual projects. This information is based on
completed and ongoing reviews of efforts to rebuild Iraq that we have
undertaken since 2003, as well as our work related to selected DOD
contract management issues. We conducted our reviews in accordance with
generally accepted government auditing standards. In our previous reports,
we have made several recommendations to improve outcomes in Iraq. DOD
generally agreed with our recommendations.

1GAO, Rebuilding Iraq: Governance, Security, Reconstruction, and Financing
Challenges, GAO-06-697T (Washington, D.C.: Apr. 25, 2006); GAO, Rebuilding
Iraq: More Comprehensive National Strategy Needed to Help Achieve U.S.
Goals and Overcome Challenges, GAO-06-953T (Washington, D.C.: Jul. 11,
2006); and GAO, Stabilizing Iraq: An Assessment of the Security Situation,
GAO-06-1094T (Washington, D.C.: Sep. 11, 2006).

2GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

My statement also considers the work of the Special Inspector General for
Iraq Reconstruction, including audits of specific projects and lessons
learned reports. We and other accountability organizations coordinate our
oversight efforts with those conducted by the Inspector General to avoid
duplication and maximize resources. In that regard, the Inspector
General's ability to provide in-country oversight of specific projects and
reconstruction challenges has enabled us to focus on national, sector, and
interagency issues.

                                    Summary

Overall, the United States generally has not met its goals for
reconstruction activities in Iraq with respect to the oil, electricity,
and water sectors. As of August 2006, oil production was below the prewar
level, and the restoration of electricity and new or restored water
treatment capacity remained below stated goals. One-third of DOD's planned
construction work still needs to be completed and some work is not planned
for completion until late 2008. Continuing violence is one of the reasons
that DOD is having difficulty achieving its goals.

The contracting challenges encountered in Iraq are emblematic of systemic
issues faced by DOD. When setting requirements for work to be done, DOD
made assumptions about funding and time frames that later proved to be
unfounded. The failure to define realistic requirements has had a
cascading effect on contracts and has made it difficult to take subsequent
steps to get successful outcomes. For example, in the absence of settled
requirements, DOD sometimes relied on what are known as undefinitized
contract actions, which can leave the government exposed to increased
costs. Further, DOD lacked the capacity to provide effective oversight and
manage risks. We also found that DOD, at times, improperly used
interagency contracts and did not take advantage of full and open
competition during the initial stages of reconstruction.

                                   Background

The contracting processes, activities, and challenges associated with
rebuilding Iraq can be viewed as similar to, albeit more complicated than,
those DOD normally confronts. We and others have already reported on the
large and continuing drain on reconstruction dollars to meet unanticipated
security needs. Further, multiple players with diffuse and changing
responsibilities have had large roles in rebuilding Iraq, complicating
lines of authority and accountability. Additionally, rebuilding a nation
after decades of neglect and multiple wars is an inherently complex,
challenging, and costly undertaking.

From May 2003 through June 2004, the Coalition Provisional Authority
(CPA), led by the United States and the United Kingdom, was the United
Nations recognized authority responsible for the temporary governance of
Iraq and for overseeing, directing, and coordinating reconstruction
efforts. During 2003, several agencies, most notably the U.S. Agency for
International Development (USAID) and the U.S. Army Corps of Engineers,
played a role in awarding and managing initial reconstruction contracts.
To coordinate and manage the $18.4 billion in reconstruction funding
provided in fiscal year 2004, the CPA established a multi-tiered
contracting approach for Iraq reconstruction activities. The CPA, through
various military organizations, awarded the following contracts: 1 program
management support contract to oversee reconstruction efforts; 6 sector
program management contracts to coordinate reconstruction efforts specific
to each sector; and 12 design-build contracts to execute specific
construction tasks. DOD is now emphasizing greater use of local Iraqi
firms to perform reconstruction work that was previously intended to be
performed by the design-build contractors.

With the establishment of Iraq's interim government in June 2004, the
CPA's responsibilities were transferred to the Iraqi government or to U.S.
agencies. The Department of State is now responsible for overseeing U.S.
efforts to rebuild Iraq. The Project and Contracting Office (PCO), a
temporary DOD organization, was tasked with providing acquisition and
project management support. In December 2005, DOD merged the PCO with the
U.S. Army Corps of Engineers Gulf Region Division, which now supervises
DOD reconstruction activities in Iraq. Additionally, the State
Department's Iraq Reconstruction and Management Office is responsible for
strategic planning and for prioritizing requirements, monitoring spending,
and coordinating with the military commander. USAID continues to award its
own contracts, which are generally associated with economic assistance,
education and governance, and certain infrastructure projects.

U.S. Efforts Have Produced Mixed Results in Restoring Iraq's Essential Services

The United States has made some progress in restoring Iraq's essential
services, but as of August 2006, such efforts generally have not met
prewar production levels or U.S. goals. Reconstruction activities have
focused on restoring essential services, such as refurbishing and
repairing oil facilities, increasing electrical generating capacity, and
restoring water treatment plants. About one-third of DOD's construction
work remains, and DOD estimates that some work is not planned for
completion until late 2008. Continued violence, however, may make it
difficult for the United States to achieve its goals.

For August 2006, the U.S. embassy reported that the oil, electricity, and
water sectors generally performed below the planned U.S. goals.
Specifically,

           o  Crude oil production capacity was reported as about 2.4 million
           barrels per day (mbpd), below the prewar level of 2.6 mbpd and the
           desired goal of 3 mbpd.

           o  In the electricity sector, peak generation capacity was
           reported at 4,855 megawatts, above the prewar level of 4,300
           megawatts, but below the U.S. goal of 6,000 megawatts. Further,
           the current demand for power continues to outstrip the available
           supply of electricity as more Iraqis purchase consumer items and
           devices requiring electricity to operate.

           o  In the water sector, new or restored treatment capacity was
           reported at about 1.44 million cubic meters per day, compared to
           the U.S. goal of 2.4 million cubic meters.3

According to senior CPA and State officials responsible for the U.S.
strategy, the CPA's 2003 reconstruction plan assumed that (1) creating or
restoring basic essential services for the Iraqi people took priority over
jobs creation and the economy and (2) the United States should focus on
long-term infrastructure projects because of the expertise the United
States could provide. Further, the strategy assumed that reconstruction
efforts would take place in a relatively benign environment. The difficult
security environment and persistent attacks on U.S.-funded infrastructure,
among other challenges, contributed to project delays, increased costs,
and canceling or reducing the scope of some reconstruction projects. As we
reported on September 11, 2006, the overall security conditions have grown
more complex, as evidenced by increased numbers of attacks and Sunni/Shi'a
sectarian strife. The continuing violence may make it difficult for the
United States to achieve its goals.

3The data for the water sector is as of September 18, 2006.

        Iraq Contracting Challenges Reflect Systemic Issues Faced by DOD

The contracting challenges encountered in Iraq are emblematic of systemic
issues faced by DOD. A fundamental prerequisite to having good outcomes is
a match between well-defined requirements and available resources. At the
sector, program, and project levels, the failure to define realistic
requirements has had a cascading effect on contracts and made it difficult
to take subsequent steps necessary to get to successful outcomes. For
example, in the absence of settled requirements, DOD has sometimes relied
on what are known as undefinitized contractual actions, which were used
extensively in Iraq and can leave the government exposed to increased
costs. Managing risks when requirements are in flux requires effective
oversight, but DOD lacked the capacity to provide a sufficient acquisition
workforce, thereby hindering oversight efforts. In Iraq, as elsewhere, we
found instances in which DOD improperly used interagency contracts to meet
reconstruction needs. Finally, the underlying market discipline offered by
competition can help promote better outcomes, but DOD, like other
agencies, was challenged, particularly early on, in its ability to realize
the benefits of competition. One or more of these factors can contribute
to unsatisfactory outcomes on individual projects; the net effect,
however, is that many reconstruction projects did not achieve their
intended goals and DOD has incurred unanticipated costs and schedule
delays.

Matching Requirements with Available Resources

One of the factors that can contribute to poor DOD acquisition outcomes is
the mismatch between wants, needs, affordability, and sustainability. This
mismatch was evident in the reconstruction efforts in Iraq. U.S.
reconstruction goals were based on assumptions about the money and time
needed, which have proven unfounded. U.S. funding was not meant to rebuild
Iraq's entire infrastructure, but rather to lay the groundwork for a
longer-term reconstruction effort that anticipated significant assistance
from international donors.

To provide that foundation, the CPA allocated $18.4 billion in fiscal year
2004 reconstruction funds among various projects in each reconstruction
sector, such as oil, electricity, and water and sanitation. As noted by
the Special Inspector General, almost immediately after the CPA dissolved,
the Department of State initiated an examination of the priorities and
programs with the objectives of reprioritizing funding for projects that
would not begin until mid- to late-2005 and using those funds to target
key high-impact projects. By July 2005, the State Department had conducted
a series of funding reallocations to address new priorities, including
increasing support for security and law enforcement efforts and oil
infrastructure enhancements. One of the consequences of these
reallocations was to reduce funding for the water and sanitation sector by
about 44 percent, from $4.6 billion to $2.6 billion. One reallocation of
$1.9 billion in September 2004 led the PCO to cancel some projects, most
of which were planned to start in mid-2005. Changes, even those made for
good reasons, make it more difficult to manage individual projects to
successful outcomes.

Further, such changes invariably have a cascading effect on individual
contracts. To produce desired outcomes within available funding and
required time frames, DOD and its contractors need to have a clear
understanding of reconstruction objectives and how they translate into the
terms and conditions of a contract: what goods or services are needed,
when they are needed, the level of performance or quality desired, and
what the cost will be. When such requirements were not clear, DOD often
entered into contract arrangements on reconstruction efforts that posed
additional risks. For example,

           o  In June 2004, we reported that faced with uncertainty as to the
           full extent of the rebuilding effort, DOD often authorized
           contractors to begin work before key terms and conditions,
           including the work to be performed and its projected costs, were
           fully defined.4 The use of undefinitized contract actions, while
           allowing needed work to begin quickly, can result in additional
           costs and risks to the government. We found that as of March 2004,
           about $1.8 billion had been obligated on reconstruction contract
           actions without DOD and the contractors reaching agreement on the
           final scope and price of the work. In one case, we found a
           contract action that had been modified nine times between March
           and September 2003, increasing estimated costs from $858,503 to
           about $204.1 million without DOD and the contractor reaching
           agreement on the scope of work or final price.

           o  In September 2005, we reported that difficulties in defining
           the cost, schedule, and work to be performed associated with
           projects in the water sector contributed to project delays and
           reduced scopes of work.5 We reported that DOD had obligated about
           $873 million on 24 task orders to rebuild Iraq's water and
           sanitation infrastructure, including municipal water supplies,
           sewage collection systems, dams, and a major irrigation project.
           We found, however, that agreement between the government and the
           contractors on the final cost, schedule, and scope of 18 of the 24
           task orders we reviewed had been delayed. These delays occurred,
           in part, because Iraqi authorities, U.S. agencies, and contractors
           could not agree on scopes of work and construction details. For
           example, at one wastewater project, local officials wanted a
           certain type of sewer design that increased that project's cost.

           o  Earlier this week, we issued a report on how DOD addressed
           issues raised by the Defense Contract Audit Agency (DCAA) in
           audits of Iraq-related contract costs.6 We again noted that DOD
           frequently authorized contractors to begin work before reaching
           agreement on the scope or price of the work. In such cases, we
           found that DOD contracting officials were less likely to remove
           costs questioned by DCAA from a contractor's proposal when the
           contractor had already incurred these costs. For example, of the
           18 audit reports we reviewed, DCAA issued 11 reports on contract
           actions where more than 180 days had elapsed between the beginning
           of the period of performance to final negotiations. For 9 of these
           audits, the period of performance DOD initially authorized for
           each contract action concluded before final negotiations took
           place. In one case, DCAA questioned $84 million in its audit of a
           task order proposal for an oil mission. In this case, the
           contractor did not submit a proposal until a year after the work
           was authorized, and DOD and the contractor did not negotiate the
           final terms of the task order until more than a year after the
           contractor had completed work (see fig. 1). In the final
           negotiation documentation, the DOD contracting official stated
           that the payment of incurred costs is required for cost-type
           contracts, absent unusual circumstances. In contrast, in the few
           audit reports we reviewed where the government negotiated prior to
           starting work, we found that the portion of questioned costs
           removed from the proposal was substantial.

4GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and
Management Challenges, GAO-04-605 (Washington, D.C.: Jun. 1, 2004).

5GAO, Rebuilding Iraq: U.S. Water and Sanitation Efforts Need Improved
Measures for Assessing Impact and Sustained Resources for Maintaining
Facilities, GAO-05-872 (Washington, D.C.: Sep. 7, 2005).

6GAO, Iraq Contract Costs: DOD Consideration of Defense Contract Audit
Agency's Findings, GAO-06-1132 (Washington, D.C.: Sep. 25, 2006).

Figure 1: Timeline of Key Contracting Events for Restore Iraqi Oil
Contract, Task Order 5

Oversight and Workforce Issues

Instability-such as when wants, needs, and contract requirements are in a
state of flux-requires greater attention to oversight, which in turn
relies on a capable government workforce. Managing the attendant risks in
unstable situations grows in both importance and difficulty.
Unfortunately, attention to oversight and a capable government workforce
has not always been evident during the reconstruction effort. Such
workforce challenges are not unique to Iraq. DOD's civilian workforce
shrank by about 38 percent between fiscal years 1989 and 2002, but DOD
performed this downsizing without ensuring that remaining staff had the
specific skills and competencies needed to accomplish future DOD missions.
In other cases, contractors have taken over support positions that were
traditionally filled by government personnel. For example, a contractor
began providing intelligence support to the Army in Germany in 1999 and
deployed with the Army to Iraq in 2003. The Army, however, found itself
unprepared for the volume of Iraqi detainees and the need for
interrogation and other intelligence and logistics services.

We and others have reported on the impact of the lack of adequate
acquisition personnel and high turnover rates on reconstruction efforts.
For example, among the lessons learned identified by the Special Inspector
General was that one of the CPA's critical personnel shortcomings was the
inadequate link between position requirements and necessary skills. In
this case, gaps existed in the experience levels of those hired, as well
as in the quality and depth of their experiences relative to their
assigned jobs. Similarly, in January 2004, an interagency assessment team
was sent to Iraq to review the CPA's contracting capability. The team
found that existing contracting personnel were insufficient to handle the
increased workload that was expected with the influx of fiscal year 2004
reconstruction funding and that the CPA needed more individuals with
acquisition expertise who could help the programmatic side of the
operation. In part, the CPA's decision to award seven contracts in early
2004 to help better coordinate and manage the fiscal year 2004
reconstruction efforts was in recognition of this shortfall. As a result,
DOD finds itself in the position of relying on contractors to help manage
and oversee the work of other contractors.

At the contract level, having personnel who are trained to conduct
oversight, assigned at or prior to contract award, and held accountable
for their oversight responsibilities is essential for effective oversight.
Our work has shown that if oversight is not conducted, is insufficient, or
is not well documented, DOD, and other reconstruction agencies, risk not
identifying and correcting poor contractor performance in a timely manner
and paying contractors more than the value of the services they perform.7
For example,

           o  Our June 2004 report found that early contract administration
           challenges were caused, in part, by the lack of sufficient
           personnel.8 We found that, due to the lack of government personnel
           to provide oversight, one contractor may have purchased $7 million
           in equipment and services that were not specifically authorized
           under the contract. Similarly, on another contract, to provide
           subject matter experts to the CPA and Iraqi ministries, DOD
           officials stated that some experts failed to report to duty or
           when they did, did not perform as expected. DOD officials
           attributed such performance issues to the lack of personnel to
           provide oversight when the experts arrived in Iraq.

7GAO, Contract Management: Opportunities to Improve Surveillance on
Department of Defense Service Contracts, GAO-05-274 (Washington, D.C.:
Mar. 17, 2005).

8 GAO-04-605 .

           o  In July 2005, we noted that USAID obligated an additional $33
           million on one of its contracts to pay for unanticipated increases
           in security costs, which left it short of funds to pay for
           construction oversight and quality assurance efforts, as well as
           to fund administrative costs.9

           Using Interagency Contracting Vehicles
			  
			  Another area in which workforce shortfalls proved problematic was
           in DOD's use and management of interagency contracting vehicles.
           We identified management of interagency contracting as a high-risk
           area in January 2005. In recent years, federal agencies have been
           making a major shift in the way they procure many goods and
           services. Rather than developing and awarding their own contracts,
           agencies are making greater use of contracts already awarded by
           other agencies, referred to as interagency contracting. This
           practice offers the benefits of improved efficiency and
           timeliness. Such contracts, however, need to be effectively
           managed, and their use demands a higher than usual degree of
           business acumen and flexibility on the part of the acquisition
           workforce. Our work and that of some agency inspectors general
           found instances of improper use of interagency contracting,
           resulting from increasing demands on the acquisition workforce,
           insufficient training, inadequate guidance, an inordinate focus on
           meeting customer demands at the expense of complying with sound
           contracting policy and required procedures, and the lack of clear
           lines of responsibility and accountability.

           During the initial stages of reconstruction, we and the DOD
           Inspector General found instances in which DOD improperly used
           interagency contracts for many of the same reasons. For example,

                        o  Our September 2005 report on water and sanitation
                        efforts found that frequent staff turnover affected
                        both the definitization process and the overall pace
                        and cost of reconstruction efforts.10 For example,
                        new contracting officers had to be brought up to
                        speed and would sometimes ask the contractor to
                        resubmit information in formats different from those
                        previously required. A PCO official also noted that
                        the contracting office in Iraq lacked sufficient
                        staff and equipment and that some of the staff
                        assigned as contracting officers lacked experience
                        with the type of projects the PCO managed.

                        o  In March 2004, the DOD Inspector General reported
                        that a review of 24 contract actions awarded by a DOD
                        component on behalf of the CPA revealed that DOD
                        circumvented contracting rules, including improperly
                        using General Services Administration federal supply
                        schedule contracts and improperly contracting for
                        personal services.11 The Inspector General attributed
                        this condition to the need to quickly award contracts
                        and to DOD's failure to plan for the acquisition
                        support the CPA needed to perform its mission.

                        o  In June 2004, we noted that a task order awarded
                        by the Air Force to provide logistical support and
                        equipment to support USAID's mission in Baghdad and
                        at other sites in Iraq was, in part, outside the
                        scope of the contract.12 The Air Force indicated that
                        it was issuing additional guidance to ensure that
                        future task orders were within the scope of the
                        contract.

                        o  In April 2005 we reported that a lack of effective
                        management controls-in particular insufficient
                        management oversight and a lack of adequate
                        training-led to breakdowns in the issuance and
                        administration of task orders for interrogation and
                        other services by the Department of the Interior on
                        behalf of DOD.13 These breakdowns included

                                     o  issuing 10 out of 11 task orders that
                                     were beyond the scope of underlying
                                     contracts, in violation of competition
                                     rules;

                                     o  not complying with additional DOD
                                     competition requirements when issuing
                                     task orders for services on existing
                                     contracts;

                                     o  not properly justifying the decision
                                     to use interagency contracting;

                                     o  not complying with ordering
                                     procedures meant to ensure best value
                                     for the government; and

                                     o  not adequately monitoring contractor
                                     performance.

           Because officials at Interior and the Army responsible for the
           orders did not fully carry out their roles and responsibilities,
           the contractor was allowed to play a role in the procurement
           process normally performed by the government. Further, the Army
           officials responsible for overseeing the contractor, for the most
           part, lacked knowledge of contracting issues and were not aware of
           their basic duties and responsibilities.

           Initial Inability to Benefit from Competition
			  
			  Finally, one tool that can help mitigate acquisition risks is to
           rely on the discipline provided by market forces when contracts
           are awarded under full and open competition-that is, when all
           responsible prospective contractors are afforded the opportunity
           to compete. During the initial stages of reconstruction, we found
           that agencies were unable to take full advantage of competition,
           in part because of the relatively short time-often only weeks-to
           award the first contracts. Our June 2004 report found that
           agencies generally complied with applicable requirements for
           competition when awarding new contracts but did not always do so
           when issuing task orders against existing contracts. We found that
           7 of the 11 task orders we reviewed were for work that was, in
           whole or in part, outside the scope of the existing contracts. In
           each of these cases, the out-of-scope work should have been
           awarded using competitive procedures or supported with a
           justification and approval for using other than full and open
           competition in accordance with legal requirements. Given the
           urgent need for reconstruction efforts, we noted that the
           authorities under the competition laws provided agencies ample
           latitude to justify their approach.

           Such latitude presupposes that the rationale for such actions is
           valid; if not, then the loss of the benefits from competition
           cannot be easily justified. For example, in November 2005, we
           sustained a protest of a sole-source contract awarded by the Air
           Force in December 2004 for bilingual-bicultural advisers that was
           placed under an environmental services contract, which, on its
           face, did not include within its scope the bilingual-bicultural
           adviser requirement.14 We concluded that the agency's efforts were
           so fundamentally flawed as to indicate an unreasonable level of
           advance planning. In the same decision, we sustained a protest of
           a second, follow-on sole-source contract awarded by the Air Force
           in July 2005 to the same company, in which the justification and
           approval prepared in support of the contract was premised on the
           conclusion that the contractor was the only responsible source,
           yet the capabilities of other firms were not in fact considered.
           The lack of advance planning, the failure to meaningfully consider
           other sources, and the attempts to justify the use of sole-source
           contracts originated, in large part, from the desire and pressure
           to meet the customer's needs in a short time frame. At the time of
           our decision, the initial contract was substantially complete, but
           we recommended that the agency promptly obtain competition for the
           requirement or prepare a properly documented and supported
           justification and approval for the second contract.

           Overall, the Special Inspector General has reported that
           competition has improved for Iraq reconstruction projects since
           the early reconstruction efforts. Next month we will issue a
           congressionally mandated report that will provide an assessment of
           competition for actions subsequent to our June 2004 report.

           Conclusions
			  
			  The reconstruction contracting problems we and others have
           reported on over the last several years are emblematic of
           contracting problems we have identified in numerous other
           situations but with more dramatic consequences for failure, as the
           nature of the task for the United States is so large and so
           costly. While some of the factors I discussed today-mismatches
           between needs, wants, affordability, and sustainability; oversight
           and workforce challenges; improper use of contracting approaches;
           and competition issues-were more prevalent in the initial stages
           of reconstruction, the risks posed by others have not yet been
           fully mitigated. Understanding not just where we are today, but
           why, is important to enable DOD to make corrections and prevent
           repeating mistakes.

           Just as multiple factors contribute to success or failure,
           multiple actors play a role in achieving successful acquisition
           outcomes, including policy makers, program managers, contracting
           officers, and the contractors themselves.

           Looking to the future, about one-third of DOD's planned
           construction work remains to be completed, including some work
           that is not planned for completion until the end of 2008. It is
           not too late for DOD to learn from its past difficulties and
           provide adequate oversight on these remaining projects. Delivering
           these projects on time and within cost is essential if we are to
           maximize the return on this investment and make a difference in
           the daily lives of the Iraqi people and help to provide the
           services they need-safe streets, clean water, reliable
           electricity, and affordable health care.

                                   - - - - -

           Mr. Chairman and members of the committee, this concludes my
           prepared statement. I will be happy to answer any questions you
           may have.

           Scope and Methodology
			  
			  In preparing this testimony, we relied primarily on our completed
           and ongoing reviews of efforts to rebuild Iraq that we have
           undertaken since 2003, as well as our work related to selected DOD
           contract management issues. We conducted these reviews in
           accordance with generally accepted government auditing standards.
           We also reviewed audit reports and lessons learned reports issued
           by the Special Inspector General for Iraq Reconstruction and work
           completed by the Inspector General, Department of Defense. We
           conducted this work in accordance with generally accepted
           government auditing standards in September 2006.

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			  For questions regarding this testimony, please call Katherine V.
           Schinasi at (202) 512-4841 or on [email protected] . Contact
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           Affairs may be found on the back page of this statement. Key
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           DiNapoli, Kate France, Dave Groves, John Hutton, Chris Kunitz,
           Steve Lord, Micah McMillan, Kate Monahan, Mary Moutsos, Ken
           Patton, Jose Ramos, and Bill Woods.

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9GAO, Rebuilding Iraq: Actions Needed to Improve Use of Private Security
Providers, GAO-05-737 (Washington, D.C.: Jul. 28, 2005).

10 GAO-05-872 .

11Office of the Inspector General, Department of Defense. Acquisition:
Contracts Awarded for the Coalition Provisional Authority by the Defense
Contracting Command-Washington. (Report No. D-2004-057, Arlington,
Virginia, Mar. 18, 2004).

12 GAO-04-605 .

13GAO, Interagency Contracting: Problems with DOD's and Interior's Orders
to Support Military Operations, GAO-05-201 (Washington, D.C.: Apr. 29,
2005).

14WorldWide Language Resources, Inc., B-296984, Nov. 14, 2005, 2005 CPD P
206.

(120594)

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[email protected].

Highlights of GAO-06-1130T , a testimony to the Committee on Government
Reform, House of Representatives

September 28, 2006

REBUILDING IRAQ

Continued Progress Requires Overcoming Contract Management Challenges

The United States, along with its coalition partners and various
international organizations, has undertaken a challenging, complex, and
costly effort to stabilize and rebuild Iraq. The Department of Defense
(DOD) has responsibility for a significant portion of the reconstruction
effort.

Amid signs of progress, the coalition faces numerous political, security,
and economic challenges in rebuilding Iraq. Within this environment, many
reconstruction projects have fallen short of expectations, resulting in
increased costs, schedule delays, reduced scopes of work, and in some
cases project cancellations.

This testimony (1) discusses the overall progress that has been made in
rebuilding Iraq and (2) describes challenges faced by DOD in achieving
successful outcomes on individual projects.

This testimony reflects our reviews of reconstruction and DOD contract
management issues, as well as work of the Special Inspector General for
Iraq Reconstruction.

In our previous reports, we have made several recommendations to improve
outcomes in Iraq. DOD generally agreed with our recommendations.

Overall, the United States generally has not met its goals for
reconstruction activities in Iraq with respect to the oil, electricity,
and water sectors. As of August 2006, oil production is below the prewar
level, and the restoration of electricity and new or restored water
treatment capacity remain below stated goals. One-third of DOD's planned
construction work still needs to be completed and some work is not planned
for completion until late 2008. Continuing violence in the region is one
of the reasons that DOD is having difficulty achieving its goals.

The contracting challenges encountered in Iraq are emblematic of systemic
issues faced by DOD. When setting requirements for work to be done, DOD
made assumptions about funding and time frames that later proved to be
unfounded. The failure to define realistic requirements has had a
cascading effect on contracts and has made it difficult to take subsequent
steps to get successful outcomes. For example, in the absence of settled
requirements, agencies sometimes rely on what are known as undefinitized
contract actions, which can leave the government exposed to increased
costs. Further, DOD lacked the capacity to provide effective oversight and
manage risks. We also found that DOD, at times, improperly used
interagency contracts and was not able to take advantage of full and open
competition during the initial stages of reconstruction. Just as multiple
factors contribute to success or failure, multiple actors play a role in
achieving successful acquisition outcomes, including policy makers,
program managers, contracting officers, and the contractors themselves.
*** End of document. ***